Question 1

Evidence that a firm has high business risk would be provided by its volatile ____.

Accepted Answer

A)  Fixed costs. 
B)  Profit after taxes. 
C)  Operating profit. 
D)  Sales. 
E)  Employee turnover. 
A)  Fixed costs. 
B)  Profit after taxes. 
C)  Operating profit. 
D)  Sales. 
E)  Employee turnover.

Question 2

Which of the following is a financial tenet of Warren Buffett?

Accepted Answer

A)  Long term prospects. 
B)  Resistance to institutional imperative. 
C)  Creation of one dollar of market value for every dollar retained. 
D)  Purchase at discount to intrinsic value. 
E)  Product is not faddish. 
A)  Long term prospects. 
B)  Resistance to institutional imperative. 
C)  Creation of one dollar of market value for every dollar retained. 
D)  Purchase at discount to intrinsic value. 
E)  Product is not faddish.

Question 3

A firm that follows a differentiation strategy

Accepted Answer

A)  Must heavily discount its prices. 
B)  Must command prices near the industry average. 
C)  Must focus on providing exceptional quality and service. 
D)  All of the above. 
E)  None of the above. 
A)  Must heavily discount its prices. 
B)  Must command prices near the industry average. 
C)  Must focus on providing exceptional quality and service. 
D)  All of the above. 
E)  None of the above.

Question 4

In a(n)____ strategy,a firm seeks to identify itself as unique within its industry.

Accepted Answer

A)  Defensive 
B)  Offensive 
C)  Low-cost 
D)  Differentiation 
E)  None of the above 
A)  Defensive 
B)  Offensive 
C)  Low-cost 
D)  Differentiation 
E)  None of the above

Question 5

Which of the following is not a technique for valuing a firm's common stock?

Accepted Answer

A)  Present value of free cash flow to equity 
B)  Present value of dividends 
C)  Price-earnings ratio 
D)  Price-book value ratios 
E)  Price-cost of goods sold ratio 
A)  Present value of free cash flow to equity 
B)  Present value of dividends 
C)  Price-earnings ratio 
D)  Price-book value ratios 
E)  Price-cost of goods sold ratio

Question 6

Exhibit 14.3
Use the Information Below for the Following Problem(S)
Harcourt Industries currently has an 18% annual growth rate while the market average is 8 percent. The market multiple is 12.
-Refer to Exhibit 14.3.Determine the P/E ratio for Harcourt Industries assuming Harcourt can maintain its superior growth rate for the next 3 years.

Accepted Answer

A)  4.25 
B)  12.50 
C)  15.67 
D)  30.10 
E)  42.80 
A)  4.25 
B)  12.50 
C)  15.67 
D)  30.10 
E)  42.80

Question 7

The expected rate of return on Rewind Industries is 2.5 times the 12 percent expected rate of return from the market.What is Rewind's beta if the risk free rate is 6 percent?

Accepted Answer

A)  2 
B)  3 
C)  4 
D)  5 
E)  6 
A)  2 
B)  3 
C)  4 
D)  5 
E)  6

Question 8

The Peterson Company has FCFF of $1000.FCFF is expected to grow by 12% next year.The cost of capital is 12% and the level of debt is $5000.The number of shares outstanding is 500.Calculate the firm's share price.

Accepted Answer

A)  $44 
B)  $55 
C)  $34.19 
D)  $47.23 
E)  $50 
A)  $44 
B)  $55 
C)  $34.19 
D)  $47.23 
E)  $50

Question 9

Porter contends that ____ and ____ are two important competitive strategies.

Accepted Answer

A)  Low cost leadership, barrier to entry 
B)  New entrant deterrent, differentiation 
C)  Low cost leadership, differentiation 
D)  Differentiation, monopolistic 
E)  Monopolistic simulation, differentiation 
A)  Low cost leadership, barrier to entry 
B)  New entrant deterrent, differentiation 
C)  Low cost leadership, differentiation 
D)  Differentiation, monopolistic 
E)  Monopolistic simulation, differentiation

Question 10

Given Gilbert's beta of 1.10 and a risk free rate of 5 percent,what is the expected rate of return assuming a 10 percent market return?

Accepted Answer

A)  21.5% 
B)  10.5% 
C)  5.5% 
D)  15.5% 
E)  16.5% 
A)  21.5% 
B)  10.5% 
C)  5.5% 
D)  15.5% 
E)  16.5%

Question 11

The franchise P/E is a function of

Accepted Answer

A)  Relative rate of return on new business opportunities 
B)  Size of superior return opportunities. 
C)  Duration of earnings growth. 
D)  a and b 
E)  a, b and c 
A)  Relative rate of return on new business opportunities 
B)  Size of superior return opportunities. 
C)  Duration of earnings growth. 
D)  a and b 
E)  a, b and c

Question 12

Exhibit 14.9
Use the Information Below for the Following Problem(S)
The Rollerball Corporation's industry averages are as follows:
Net Profit Margin = 7.5%; Total Asset Turnover = 2.2; Total Assets/Equity = 2.0
Rollerball Corporation has the following financial statements for year ending 12/31/2008. (000's omitted)
 $\begin{array}{lr}
\text { Sales } & 5,450 \
\text { Cost of Goods Sold } & \underline{3,250} \
\text { Gross Profit } & 2,200 \
\text { Depreciation } & 820 \
\text { Operating Expenses } & 470 \
\text { Administration Exp. } & \underline{115} \
 \text { Operating Profit } 795 &  \
\text { Interest Expense } & \underline{88}\
\text { Profit Before Taxes } & 707\
\text { Taxes } & \underline{247}\
\text { Net Income } & 460\
\text{Dividends} & 250
\end{array}$ 
 $\begin{array}{lrlr}
\text { Assets } & & {\text { Liabilities }} \
\text { Cash } & 100 & \text { Notes Payable } & 850 \
\text { Accounts Receivable } & 1,250 & \text { Accounts Payable } & \underline{1,550} \
\text { Inventory } & \underline{1,125} & \text { Total Current Liab. } & 2,400 \
\text { Total Current Assets } & 2,475 & \text { Long Term Debt } & 425 \
\text { Net Fixed Assets } & \underline{1,450} & \text { Common Stock } & 400 \
\text { Total Assets } & 3,925 & \text { Retained Earnings } & \underline{700} \
& & \text { Total Liab. \& Earnings } & 3,925
\end{array}$
-Refer to Exhibit 14.9.Calculate Rollerball Corporation's Total Assets/Equity ratio.

Accepted Answer

A)  3.57 
B)  4.28 
C)  5.61 
D)  7.35 
E)  9.81 
A)  3.57 
B)  4.28 
C)  5.61 
D)  7.35 
E)  9.81

Question 13

Which of the following is not a determinant of the capital gain component?

Accepted Answer

A)  The percentage of earnings retained for reinvestment. 
B)  The relative rate of return earned on the funds retained. 
C)  The time period for these growth investments. 
D)  The amount of capital invested in growth investments. 
E)  All of the above are determinants of the capital gain component. 
A)  The percentage of earnings retained for reinvestment. 
B)  The relative rate of return earned on the funds retained. 
C)  The time period for these growth investments. 
D)  The amount of capital invested in growth investments. 
E)  All of the above are determinants of the capital gain component.

Question 14

Present value of free cash flow to equity resembles the present value of earnings concept except that it includes the capital expenditures required to maintain and grow the firm and the change in working capital required for a growing firm.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following is a market tenet of Warren Buffett?

Accepted Answer

A)  Long term prospects. 
B)  Resistance to institutional imperative. 
C)  Creation of one dollar of market value for every dollar retained. 
D)  Purchase at discount to intrinsic value. 
E)  Product is not faddish 
A)  Long term prospects. 
B)  Resistance to institutional imperative. 
C)  Creation of one dollar of market value for every dollar retained. 
D)  Purchase at discount to intrinsic value. 
E)  Product is not faddish

Question 16

Which of the following is not considered a favorable attribute of firms by Peter Lynch?

Accepted Answer

A)  Firm's product is not faddish 
B)  Firm has a sustainable comparative competitive advantage over its rivals 
C)  Firm's industry or product has market stability 
D)  Firm can benefit from cost reductions 
E)  All of the above are considered favorable attributes by Peter Lynch 
A)  Firm's product is not faddish 
B)  Firm has a sustainable comparative competitive advantage over its rivals 
C)  Firm's industry or product has market stability 
D)  Firm can benefit from cost reductions 
E)  All of the above are considered favorable attributes by Peter Lynch

Question 17

Exhibit 14.10
Use the Information Below for the Following Problem(S)
 $\begin{array}{lr}
& \underline{\text{Left-Aid Corporation}}\ 
\text { DPS } & \$ 2.45 \
\text { Total Asset Turnover } & 3.80 \
\text { Net Profit Margin } & 6.50 \% \
\text { EPS } & \$ 3.50 \
\text { Total Assets/Equity } & 1.60
\end{array}$
-Refer to Exhibit 14.10.What is Left-Aid Corporation's expected sustainable growth rate?

Accepted Answer

A)  11.9% 
B)  18.7% 
C)  22.1% 
D)  27.7% 
E)  30.0% 
A)  11.9% 
B)  18.7% 
C)  22.1% 
D)  27.7% 
E)  30.0%

Question 18

When a firm seeks to identify itself as unique in its industry in an area that is important to buyers it is known as a

Accepted Answer

A)  Defensive strategy 
B)  Differentiation strategy 
C)  Low-cost strategy 
D)  Focused strategy 
E)  Value strategy 
A)  Defensive strategy 
B)  Differentiation strategy 
C)  Low-cost strategy 
D)  Focused strategy 
E)  Value strategy

Question 19

Low-cost leadership and differentiation are two major competitive strategies suggested by Porter.

Accepted Answer

A) True 
 B)False

Question 20

What is the implied growth duration of Howard Industries given the following:
$$\begin{array} { l c c } 
& \text { NuP Industrials } & \text { Hqwird Industries } \
 \text { P/ERetios } & 14 & 24 \
\text { Average Groth } ( \% ) & 6.0 & 12.0 \
\text { Dividend Yield. } & .07 & .04
\end{array}$$

Accepted Answer

A)  11.5 years 
B)  16.8 years 
C)  22.6 years 
D)  18.4 years 
E)  20.6 years 
A)  11.5 years 
B)  16.8 years 
C)  22.6 years 
D)  18.4 years 
E)  20.6 years

Exam 14: Company Analysis and Stock Valuation

Evidence that a firm has high business risk would be provided by its volatile ____.

Which of the following is a financial tenet of Warren Buffett?

A firm that follows a differentiation strategy

In a(n)____ strategy,a firm seeks to identify itself as unique within its industry.

Which of the following is not a technique for valuing a firm's common stock?

The expected rate of return on Rewind Industries is 2.5 times the 12 percent expected rate of return from the market.What is Rewind's beta if the risk free rate is 6 percent?

The Peterson Company has FCFF of $1000.FCFF is expected to grow by 12% next year.The cost of capital is 12% and the level of debt is $5000.The number of shares outstanding is 500.Calculate the firm's share price.

Porter contends that ____ and ____ are two important competitive strategies.

Given Gilbert's beta of 1.10 and a risk free rate of 5 percent,what is the expected rate of return assuming a 10 percent market return?

The franchise P/E is a function of

Which of the following is not a determinant of the capital gain component?

Present value of free cash flow to equity resembles the present value of earnings concept except that it includes the capital expenditures required to maintain and grow the firm and the change in working capital required for a growing firm.

Which of the following is a market tenet of Warren Buffett?

Which of the following is not considered a favorable attribute of firms by Peter Lynch?

Exhibit 14.10 Use the Information Below for the Following Problem(S) DPS \ 2.45 Total Asset Turnover 3.80 Net Profit Margin 6.50\% EPS \ 3.50 Total Assets/Equity 1.60 -Refer to Exhibit 14.10.What is Left-Aid Corporation's expected sustainable growth rate?

When a firm seeks to identify itself as unique in its industry in an area that is important to buyers it is known as a

Low-cost leadership and differentiation are two major competitive strategies suggested by Porter.

What is the implied growth duration of Howard Industries given the following: NuP Industrials Hqwird Industries P/ERetios 14 24 Average Groth (\%) 6.0 12.0 Dividend Yield. .07 .04

An Overview of the Investment Process

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Securities Markets: Organization and Operation

Security-Market Indexes

Efficient Capital Markets

An Introduction to Portfolio Management

An Introduction to Asset Pricing Models

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Analysis of Financial Statements

Security Valuation Principles

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Industry Analysis

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Professional Money Management, alternative Assets, and Industry Ethics

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Porter contends that and are two important competitive strategies.